Will Los Angeles Join Detroit As a Fiscal Zombie City?

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Few people should have been surprised when Michigan Gov. Rick Snyder said last week that he was beginning a state takeover of insolvent Detroit. After all, the city's schools have been operating under state control since 2009, while Detroit government itself has been running an accumulated deficit since 2005 and papering over its finances with borrowing.

No one would mistake Los Angeles for Detroit, however, and not just because of the weather. Los Angeles is not a fading rustbelt metropolis but a global city, a center of entertainment, finance and trade. But at a forum for mayoral candidates last month, one journalist on the panel of questioners asked the contenders whether they thought Los Angeles faced a real prospect of bankruptcy, and at least two of the candidates agreed it did.

The question didn't come out of nowhere. Last April, the city's administrative officer issued a report on Los Angeles' deteriorating finances and its long-term structural imbalance, which is budget talk for the fact that the city's projected revenues and spending don't match up over the coming years. Just to ensure that readers didn't miss his point, the CAO, Miguel Santana, started his report by recounting the path to insolvency trod by another California city, Stockton, and observed that in that case, "Getting to the doorstep of bankruptcy did not happen overnight."

Since then, Los Angeles' political leadership has engineered small changes in its budget, such as less expensive pensions for new workers, but that won't generate substantial savings for years. Now a new report issued last week by a budget watchdog group, California Common Sense, says that Los Angeles' current workforce retirement costs alone are so great that reforming then is essential to ‘avoiding insolvency' in the nation's third largest city. Pension costs have gone in 10 years from 3 percent of the city's budget to 18 percent, and even with the increased contributions by the city, its pension debt is growing larger.

Los Angeles represents the new model of urban distress.  That is so because it isn't coming face-to-face with its crisis after decades of decline spurred by job losses in its single most important industry, as Detroit did with the auto makers. For all of the shortcomings of Los Angeles' civic leadership, the city also hasn't endured the political follies of Detroit during its economic decline, like the tenure of Mayor Kwame Kilpatrick, dubbed "America's hip-hop mayor," who went to jail for obstruction of justice after lying about an extramarital affair in a sex-and texting scandal with a city employee, and who still faces federal charges for extortion, bribery and fraud.

Although Los Angeles hasn't been rocked by the kind of jobs exit that hit Detroit, the Southern California economy is not robust, and hasn't been for some time. More to the point, the area's economy isn't generating nearly the kind of growth needed to support its rapidly increasing government costs, most especially the cost of employing its workers. Even during the housing bubble-induced economic growth of 2005 through 2007 in Southern California, the greater Los Angeles area never exceeded its jobs peak of 20 years ago. For more than two decades, the area's economy has just been cycling through eras of boom and bust without any permanent job growth.

The city's manufacturing economy, which remained vibrant far longer than Detroit's, has been on a steady decline of late, losing 55 percent of its jobs over 20 years. Nothing has stepped up to take its place. The city's information industries, a large part of any tech economy, have been stagnant. So has LA's imposing professional and business service sector, stuck in another 20-year boom and bust cycle that has resulted in no net new jobs. The result, as Wendell Cox showed in a 2011 City Journal piece, The Long Stall, is that Los Angeles' economy has essentially be treading water for more than a decade. You can't have that kind of mediocre economy when you have the rising municipal costs that Los Angeles boasts.

Last year Santana projected the city's revenues would increase by $400 million, from $4.4 billion to $4.8 billion, in four years. The problem is that the city's expenditures, driven almost entirely by employee costs, were projected to grow by twice that amount, led by some $300 million in additional pension payments alone. To contain the rising costs, which would have been hundreds of millions of dollars higher, the city has been reducing its headcount the last several years, by 5,300 workers, or nearly 15 percent. Even so, the city has raised fees, fines and taxes by hundreds of millions of dollars. On Tuesday, voters apparently rejected another tax increase, of $200 million on the sales tax, even though supporters claimed the extra revenue was essential to avoiding even steeper cuts, including in the police force. It seems Angelenos are getting tired of spending more, and getting less for it.

In the midst of all of this Los Angeles is having a mayoral election in which the candidates can't even agree on how bad the budget situation has gotten. As the Los Angeles Times recently observed, the city's residents headed to the polls Tuesday for the first round of voting, "With few specifics about how the city's next mayor and City Council would fix City Hall's chronic financial problems." The two apparent winners of Tuesday's vote, City Comptroller Wendy Greuel and former Council President Eric Garcetti, will now face each other in a runoff after having campaigned hard for government union support. Both said they plan to fix the city's problems by growing the economy and tax revenues, which is what you tell the unions to get their backing without admitting to the tough budget choices ahead.

Neither of them will have an easy job in a heavily unionized city where 91 percent of general fund costs are salary and benefits. Former Mayor Richard Riordan, who wrote presciently in 2010 about the city's coming fiscal train wreck, found that out last year when he tried to mount a ballot initiative to reform the city's pension system and reduce costs. Riordan gave up after experiencing heavy opposition from unions, including having union members harass his signature gatherers in malls and shopping centers as they tried to collect enough support for the initiative.

California Gov. Jerry Brown has been talking up California's comeback in recent weeks. Somehow, however, that doesn't sound very convincing when policy makers in your state's biggest city, the place that used to be the driver of your economy, are currently debating whether it is going broke or not.


Steven Malanga is an editor for RealClearMarkets and a senior fellow at the Manhattan Institute

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